ZK International Group intends to build a new mill in its native China, to capture a larger share of the demand for stainless and carbon steel pipe that is vitally needed for water and natural gas transmission in the nation's immense infrastructure build-out.

ZK also may seek acquisitions of existing pipe-making facilities while it attempts to quintuple production within about three years. The 19-year-old Wenzhou-based pipe mill even has ambitions to export stainless pipe to the United States, chairman and chief executive officer Jiancong Huang said during a visit to American Metal Market's New York office on Tuesday April 17.

Company executives rang the closing bell at the Nasdaq Stock Market on Monday April 16, in celebration of the company's US initial public offering (IPO) in September.

An established network of 100 distributors and a long track record in supplying utilities, such as Shenzhen Water Group and Towngas China, gives ZK a leg up when new and expanded pipe contracts are awarded, the CEO said. Another advantage is ZK pipe is connected via a novel hand-held cutting and crimping tool, which speeds installation on the construction site.

"We started in 1999 and we have been doing [research and development] ever since, and we have 29 patents. That differentiates us from the other competition," Huang said through an interpreter. "We have very good relationships with the water supply company and the gas supply company."

ZK originally took over a steel mill that formerly made coil. At the company's five-acre Wenzhou campus, its mill lines produce welded stainless and carbon steel pipes in diameters of 6 inches and smaller, and the plant also makes strips and fittings. The mill floor was reset in 2007 and is due again for an upgrade that will install a new digitized inventory and traceability framework. The company will have the ability to integrate Blockchain-based tracers to create an "intelligent piping system" confirming the delivery of clean drinking water to the customer.

ZK sources all of its raw materials from within China. The company procures stainless steel sheet including austenitic 304, 304L, 316 and 316L, as well as some processed carbon steel substrate. ZK does not take a position on the controversy over China's need to reduce steel overcapacity, because stainless goods are not in the cross hairs. The Chinese government intends to cut another 30 million tonnes of basic steelmaking capacity in 2018 after already eliminating 120 million tons in 2016-17.

The government's pledge "doesn't hurt our costs to buy raw material," ZK secretary Di Chen said. "Stainless steel is not a big market compared with other metal products. It is a niche market."

Metal Bulletin’s price assessment for 2mm Chinese domestic grade-304 stainless steel cold-rolled coil, on an in-warehouse basis, stood at 14,100-15,000 yuan ($2,245-2,388) per tonne on Thursday April 19, up from 13,700-14,500 yuan per tonne a week earlier.
Domestic market moat
ZK International’s US shares have lost more than half of their value since January and are now trading below their debut price seven months ago. Still, the company is well-positioned to weather a worsening trade relationship between the US and Chinese governments, Chen said, citing import curbs announced by President Donald Trump this year. Only 5% of ZK’s material is sold overseas.

"We are not worried about a trade war, because it's a trade war between China and the United States. We do most of our [exports] to Europe and Australia and Africa," Chen said. "But if the trade between China and the US gets worse and other companies cut their trade to the US, they may try to export more to Europe and Australia."

Even so, it would take years for competitors to match the inroads with distribution networks and other long-term relationships that ZK has built up, so Huang and Chen do not fear that scenario. Their company's potential market share inside China probably exceeds its future capacity anyway.

Chinese domestic stainless substrate availability may be enhanced if Taiwan bans the importation of Chinese material in an effort to curry favor with the United States and win a Section 232 tariff exemption.
China's natural-gas push
ZK's small-diameter goods are deployed in the final stage of the transmission of gas or water into and within commercial and residential buildings. The company forecast a year-on-year growth rate of 25% for fiscal 2018, bringing annual revenue for this year to a projected $56.2 million from $44.95 million in fiscal 2017. ZK also has an order backlog of $4 million and rising, executives said.

About 92% of its output is stainless steel and 8% is carbon steel, Chen said. Currently, 95% of the pipe is for water transmission and only 5% is for gas transmission. Both segments are growing rapidly in China.

An estimated 190 million Chinese, or about 14% of the nation’s population, are sickened each year from drinking contaminated water, according to China’s own government statistics. Government authorities have spearheaded massive improvements to the water transmission networks by replacing old plastic and copper pipe with stainless steel in residential and nonresidential buildings. ZK expects its natural-gas segment to grow as China converts its power production to gas from coal. Chen said ZK is one of only three approved suppliers of such goods with Towngas China's "quality supplier database."

The company supplied pipe to Beijing International Airport and to the city's landmark "Bird's Nest" national stadium. It is also providing stainless steel pipe to China's subway systems for converting their equipment-cooling water pipes to stainless steel - which lasts 60-plus years - from iron - which lasted only 10 years and needed to be coated annually.

Notwithstanding all the public and private investment in China, pipe prices are stable. Huang and Chen credited ZK's improved profits to expanded output.

Independent from any future expansions, ZK has the potential to achieve 15-20% efficiency gains from the current round of upgrades at the existing plant in Wenzhou, according to David Christensen, president of ZK subsidiary XSigma. Christensen also serves as CEO of Phoenix, Arizona-based TNT Blockchain, which is consulting on new technology at the plant.

In March, ZK announced that it formed a subsidiary in Uganda to compete for pipe contract used in energy projects in the landlocked East African country.

Huang said he is "open-minded" about selling ZK stainless water-transmission goods to the United States and has applied for an export license.

"There was a poison-water event in the US," Huang said, referring to the water crisis in Flint, Michigan. "We may plan to enter the US market to supply stainless pipe - unless Trump stops that - if there are good companies we can work with."